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Josh DAmaro, chairman of Disney Parks, Experiences and Products (center front right) and Jeff Vahle, president of Walt Disney World Resort (center front left), pose with Disney cast members for a photo in front of Cinderella Castle prior to the phased reopening of Magic Kingdom Park at Walt Disney World Resort on July 11, 2020 in Lake Buena Vista, Florida.
David Roark/Walt Disney World Resort/Getty Images
It’s hard to remember what life was like before Covid-19, but a recent weekend at
Disney
World is a reminder of what it may be like when things normalize, thanks to vaccines.
Walt Disney’s
theme parks in Orlando, Fla., were packed but carefully controlled. To get into the parks, you had to have your temperature checked at the gate. You also had to wear a mask that covered your nose and mouth. Anyone who failed to observe proper mask protocols was asked by a staff member to comply. Lack of compliance meant ejection.
The lines for rides were still long, but markers were strategically placed to keep guests properly spaced. At serpentine lines where people were huddled together, plexiglass dividers blocked airborne particulates. Staff members wielding spray bottles filled with yellow sanitizing solution were omnipresent.
The masks were a little tedious from time to time, and it was odd wearing them for family photos, but it felt incredible to be out of quarantine, traveling, and moving about.
That Walt Disney (ticker: DIS) stock has recently hit an all-time high is perhaps a sign of how much pent-up demand exists to return to a pre-Covid life. Disney is a likely beneficiary of the pending normalization, when parents are again able to take their kids on vacation, probably providing a positive impact on the company’s earnings.
It would also not be surprising if Christine M. McCarthy, Disney’s chief financial officer, disclosed on the company’s next earnings call that she personally designed a T-shirt spotted on a father, which simply read, “Most Expensive Day Ever.”
Though the hunger to buy reopening stocks like Disney seems frothy, Disney’s ability to adapt and overcome—even when confronted by a pandemic that has adversely affected its theme parks—is incredible.
We were early to recognize the company’s streaming strategy in July 2020 that has since dramatically remade the company. First-quarter earnings had been pounded lower by the pandemic when Disney reported results in mid-February, but the stock still advanced in anticipation of better days. Hence, it makes sense to wager that Disney may set another all-time high when it reports second-quarter earnings in May.
To pre-position for that, investors could sell a May $190 put, and buy a May $200 call. The short put positions investors to buy the stock on a pullback, while the call will increase in value if the stock rallies higher. When the stock was at $195.38, the risk-reversal strategy—that is selling a put and buying a call with a higher strike price but the same expiration—cost about 75 cents.
If the stock is at $220 at expiration, the call is worth $20. Should the stock price fall below the strike price at expiration, the trade fails.
During the past 52 weeks, Walt Disney stock has ranged from $79.07 to $203.02. Shares are up about 8% so far this year, sharply outperforming the S&P 500 index.
The risk to the strategy is that Disney’s stock tumbles far below the put strike price. Should the stock be at $150, for example, investors would be obligated to buy shares at $190, to cover the put, or try to adjust the position in the options market.
Many investors are hesitant to sell puts. They don’t like the downside exposure, but that aversion often makes the strategy attractive for more-aggressive investors.
Besides, Disney’s implied volatility is about 37%, or about double that of the S&P 500. Many investors like selling options with elevated volatility. Moreover, it’s impossible to convey how busy the parks were, and the enthusiasm and exhilaration of the crowd.
If you can acclimate yourself to the put sale, which helps make the total strategy price more attractive, the trade positions you in the center of the reopening frenzy, a place where Mickey Mouse seems unusually well situated to profit.
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